ENVIRONMENTAL ACCOUNTING

An Essential Component of Business Strategy

Department of Marketing
Group: Lucky 13 (Phase 1)
I
 Term Paper

Subject
Financial Accounting
(Course No: 213)

Department of Marketing
Faculty of Business Study
University of Dhaka
2008

II
Prepared For
Abu Reza Mohammad Muzareba
Lecturer
Department of Marketing
Faculty of Business Studies
University of Dhaka

Prepared By
Group: Lucky 13 (Phase I)
Section: A
Batch: 13th
Department of Marketing
Faculty of Business Studies
University of Dhaka

Submission Date
November 5, 2008

3
 Letter of Transmittal

October 25, 2008

Abu Raza Mohammad Muzareba

Lecturer
Department of Marketing
Faculty of Business Studies
University of Dhaka

Subject: Submission of the report.

Dear Sir,

This is the report on Environmental Accounting: an essential component of Business strategy that
you have assigned us on different lectures on September 18, 2008.

The report carrying essential environmental accounting component bears the proof of our sincerity
and professionalism. We try our best to make the report an excellent. This report is made
according to your direction. We appreciate you having this report as it will, we hope, help us in our
academic and carrier life.
We will be available for any further inquiries whenever you call us.

Thanking You,
Lucky 13 (Phase I)
BBA, 13th Batch
Section: A
Department of Marketing
Faculty of Business Studies
University of Dhaka

4
 Lucky 13
(Phase I)

Name Roll
Rashed Mostafa 025
Md. Aminul Islam 027
Jewel Chakma 177
M M Arifur Rahman 171

5
 Table of Contents

Acknowledgement……….………………………………………….. Vl

Introduction…..………………………………………….………….. Vll
Introduction of Environmental Accounting………………..………. 01
Environmental Management Accounting………………...…….….. 06
Environmental Cost Accounting .………………….……..………… 06
Integrating Environmental Policy in Business Strategy …………… 08
Integrating the environmental department with business functions… 12
Environmental management………………………….……………… 15
The Corporate Environmental Policy……… …….………………… 20
Development of environmental standards…………………………… 29
Role of environmental manager……………………….……………… 30
Business uses of environmental accounting costs….………………… 32
Environmental Policy versus Environmental Regulation…………… 34
Education for the multidiscipline team…………….……………..… 35

Conclusion …………………………………………….…………… 38

Reference…………………………………………………………….. 58

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 Acknowledgement

This report is the result of many people’s contributions and help. At this moment we
want to thank those people who extended their help providing suggestions and
advices.

Special thanks go to our honorable Course Instructor

Abu Raza Mohammad Muzareba

Lecturer
Department of Marketing
Faculty of Business Studies
University of Dhaka

Who helped us giving tips, suggestions and valuable advices regarding the report, he
is also credited for her excellent teaching in this course.

We also want to make thanks to those writers whose books helped us to make this
valuable report. And also thanks Inter Science Group to provide important
information.

Our friends who are in the following helped us a lot.

7
 Introduction

*Origin of the study - This is a part of the B.B.A program

as students of business faculty, we
have to do such type of report.

*Objective of the study - To gather enough information to

understand necessity of
environmental accounting in
business strategy that can help us to
make a decision.

*Mythology- By the help of several business

books and various web sites.

*Limitation of the study- To finish this we face some problem

such as-
# Time Limitation
# Monitory Problem
# Financial Limitation etc.

8
Environmental accounting is on an expansion path. With increasing social focus on
the environment, accounting fills an expectation role, to measure environmental
performance. The status of environmental awareness provides a dynamic for
business reporting its environmental performance. Examining the integration of
environmental policy with business policy is the focus of this research. The business
firm’s strategy includes responding to capital and operating costs of pollution
control equipment. This is caused by increasing public concerns over environmental
issues, and by a recent government-led trend to incentive-based regulation. This
paper describes the environmental component of the business strategy, producing the
required performance reports and recognizing the multiple skills required to
measure, compile and analyze the requisite data. Special emphasis of the
research is on generation of reports and their standards, for the
range of business and regulatory purposes.

INTRODUCTION

Environmental accounting is an inclusive field of accounting. It

provides reports for both internal use, generating environmental
information to help make management decisions on pricing,
controlling overhead and capital budgeting, and external use,
disclosing environmental information of interest to the public and
to the financial community. Internal use is better termed
environmental management accounting.
For the purpose of this research, both internal and external uses
are considered. The contribution of multiple disciplines provides a
base for determination of environmental impacts and related costs.
Specific details of that determination serve one or both of the uses.
Impact of business activity on the environment is found in several
forms.

 Media: air, water, underground pollution.

 Targets: drinking water, land and habitat for endangered and
threatened species.
 Global sites: oceans, atmosphere, land mass.

An array of pollutants, including toxic, hazardous and ‘warming’, is

accountable to business activities. From this range of

9
environmental impacts, multiple disciplines are needed for analysis
of effects, and for integration into management decisions and
accounting reporting.

Non-accounting disciplines needed include:

 environmental science,
 environmental law and regulation,
 finance and risk management and
 Management policies and control systems.

The range of environmental costs, energy and material use and

waste disposal, insurance and fines and penalties, shows
participation of multiple disciplines, along with accounting sub-
disciplines. The yield of this effort is the decision support system, in
which environmental impact can be determined specifically in the
following terms:

 FCA, full cost accounting,

 TCA, total cost assessment,
 LCC, life-cycle costs,
 LCCA, life-cycle cost analysis, and
 TQEM, total quality environmental management.

Results of environmental reporting include full-cost pricing and

‘eco-accounting’. Also, an environmental management system,
EMS, provides a databank of environmental performance data,
from which environmental cost accounting, ECA, relating all
environmental costs, can be directly produced (Lally, 1998).

Cross-functional goals and procedures indicate that business policy

and environmental policy are intertwined (Dorweiler and Yakhou,
2002); see Figure 1.

• Senior managers at the institutional level establish environmental

policy and assess environmental performance.
• Environmental managers at the operational level implement
environmental policy.

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• Environmental staff is involved in capital decision-making for
environmental control equipment.

So multiple functional activities are included:capital budgeting and

expense budgeting; financial and non-financial performance
measurements; budget control and product costing. Multi-
disciplinary teams have a clear distribution of tasks and functions,
at institutional levels and at operational levels.

Note that relationships in environmental reporting are integrated.

The data sources are based in design, engineering and operations
records, rather than broad areas such as energy costs and waste
minimization. The extensive data are converted as input to the
accounting system.

A side benefit is the decreased need for allocation of environmental

costs to products and processes. Also, the nature of environmental
costs determines the capital investment assessment method.
Discounted-cash flow is preferred, rather than payback period,
given the longer time horizon for benefits from environmental
capital investment (Grinnell and Hunt, 2000).

ENVIRONMENTAL ACCOUNTING

Before tracing the role of business strategy and environmental

accounting, a base understanding of environmental accounting is
useful. This is the purpose of the following. At the outset,
environmental accounting has proceeded through a period of
uncertain status. Mathews (1997) describes the development in
four phases:

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 descriptive, with normative models of
1970s conduct
debate on the role of accounting in
1981–1990 disclosing information on
environmental activities;

maturing of environmental accounting,

in making environmental disclosures,
1991–1995 and in launching environmental
auditing;
The role of environmental accounting
is viewed as measuring environmental
Now performance exceeding regulatory
standards. This role was initiated in
about 1996.

Environmental
Business Policy &
Policy
MISSION
Boards of Directors Constitution
and Institutional Environmental policy
Investors Corporate sustainability
STATUS-
ANALYSIS
Business purpose Environmental protection
GOALS
Responsibility to
Use of resources
environmental principles*
Capital NEPA prevent
Workforce environmental
Markets degradation
Media, Location
OBJECTIVES
Performance targets Statutory policy
by location, market Statutory standards

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 STRATEGY
Compliance at Compliance within
maximum cost standards and preserving
effectiveness the environment
IMPLEMENTATION
Supply chain Neighbours, community
Manufacturing sustainability of resource
Distribution system use
TACTICS
Use of resources
Set mode of
Material, energy, other
operations for
natural resources
maximum
‘greening’ product,
productivity
process
OPERATION
Optimize production
Avoid violations
Minimize waste within
Emissions, discharge of
operating guidelines
pollutants
Operate within permit
MONITOR &
CONTROL
Environmental impacts
Financial statement
‘Voluntary Environmental
Operations reports
Reporting Initiative’
Financial and
Comparability
Management Environmental Accounting
transparency
Accounting
STRAGETIC
ADJUSTMENT
Redeploy resources
Volunteerism**
Correction tactics
Agreement with agency
Implementation
*environmental principles: Valdez principles.
**Voluntary Environmental Reporting Initiative – VERI.

Figure1. Integrating business policy and environmental policy

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An environmental accounting framework is yet to develop; such a
framework would contribute standards for reporting, and standards
for accounting. The state of the regulatory framework is given by
Mathews (1997). The emphasis of a framework is to provide a
general fit over the area regulated:

 raise awareness of environmental issues;

 develop guidelines to assist identification of environmental
issues and evaluation and reporting of those issues;
 provide education programs across disciplines focused on
environmental issues and their accounting treatment and
 develop practices of environmental accounting, with
recommendations on best practices.
A fifth direction is to link teaching with developments and practices
in business.

Such a framework is to demonstrate that the accounting profession

is accepting the challenge of a contemporary issue: environmental
impact of business activity (Medley, 1997).Accounting
professionals appear to focus on the role of environmental
accounting, under consideration that environmental issues are
fundamental to human survival. The nature of environmental
accounting practice is considered next.

Environmental Management Accounting

Environmental management accounting (EMA) is defined as the

generation, analysis and use of financial and related non-financial
information, to support management within a company or business
(Bartolomeo et al., 2000). EMA integrates corporate environmental
and business policies, and thereby provides guidance on building a
sustainable business.
EMA analyzes environmentally related financial costs and benefits,
contributing to recognition of the high and increasing levels of
capital and operating expenses, for pollution control equipment,
and environmental taxes. Also, possible environmental initiatives,
for example, incentive-based regulation, are incorporated in

14
analysis and reporting (Fryxell and Vryza, 1999).

Environmental cost accounting

An advanced step of development of environmental accounting is

development of environmental cost accounting (ECA). Cost
accounting is defined as use of the accounting record to directly
assess costs to products and processes (Lally, 1998). In this
approach, costs are accounted for by their specific causes.

Environmental cost accounting directly places a cost on every

environmental aspect, and determines the cost of all types of
related action. Environmental actions include pollution prevention,
environmental design and environmental management. Past
approaches on environmental impacts were based mainly on
environmental cleanup costs and past product disposal.

The contribution of ECA is to account for a way of doing business;

see Box 1. Arbitrary allocation of environmental overhead is
eliminated or reduced, and true costs of products are determined.
Environmental cost accounting in producing environmental costs is
described in two ways (Grinnell and Hunt, 2000).

 One is the A–B–C framework, looking for ‘cost drivers’ at

organizational levels: unit, batch, product-sustaining and
facility.
 The other is a cost-of-quality framework, which defines
environmental costs in prevention, appraisal and internal and
external failure. This cost-of-quality approach supports
pollution prevention as an appropriate management strategy.

Another significant contribution of ECA is its linkage to ISO 14000.

The environmental data in an environmental management system
(EMS) based on ISO 14000 standards is consistent with
environmental cost accounting. Where a company adopts ISO
14000 standards, ECA is a tool, part of a process for treating the
environment as integrated with (i) business strategy and (ii)
decision-making (Lally, 1998).

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 Environmental management is based on management
accounting with activity-based costing as a main analytical
approach to determining environmental costs and to quantify
cost savings due to environmental performance.

Environmental effects are established by setting hypotheses

for whether or not to adopt proactive practices: pollution
prevention and accounting for environmental costs-to-causes.

Environmental policy can be compared between the US and

Europe. Environmental management is found to be involved in
the same activities with a substantial difference in regulatory
enforcement: the US uses liabilities and penalties while the
European Union does not. Equivalence is shown by the
prominent role of environmental management in European
business organizations and business strategies. European
companies are adopting ISO 14001 standards at a faster rate
than US companies.

As noted in the body of the paper, the International Standards

Organisation develops standards for use independently or for
use within an EMS by an organization.

Box 1. Environmental accounting practice in Europe (Bartolomeo et

al., 2000). Environmental management accounting practice in
Europe is compared with practice in the United States.

Integrating Environmental Policy in Business

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Strategy

Development and implementation of new business strategies for

meeting environmental challenges will be a central issue for
companies in the years ahead. Accounting for environmental costs,
and associated accounting education, will play critical supporting
roles.

The adoption of environmental policy as a component of business

policy is currently considered voluntary (Gallhofer and Haslam,
1997). The term adoption implies that business policy was without
express concern for the environment, and since the mid-1990s
environmental policy has become a proactive decision of business
organizations.

An alternative view is given as business’s response to a threat of

interventionist regulation. An organized lobbying effort, to forestall
additional, more interventionist regulation, has been unsuccessful
through the history of environmental protection since the 1970s
(Mathews, 1997). Further, the cost of response to increasing
regulation provides a real incentive to adopt a proactive approach
to the environment.

The proactive approach is not only more cost-effective, but it also

opens new business avenues; see Table 1. For new business,
worldwide and in ‘green’ markets (eco-labeling and recycling),
opportunities are open to a company that is expressly
environmental, not necessarily an extreme ‘green’ company.

From new avenues, cost savings are achieved through energy

conservation and waste minimization. These savings, which
increase profitability, are generated by production and engineering
disciplines. For example, the contribution from strategic
management specialists and the technical expertise required to
address product problems of recycling and re-engineering will be
jointly necessary in the development of strategies of reducing
impacts on the environment. In both approaches, the company’s
competitive advantage is improved.

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The interdisciplinary approach to environmental
accounting

An inescapable feature of environmental accounting is the need for

multiple disciplines.
Inescapability is found in several dimensions of environmental
accounting (Grinnell and Hunt, 2000).

 First is the need to position environmental policy in the overall

business policy and strategy.
 Second are the disciplines involved in producing
environmental accounts and their reporting.
 Third is the audit requirement to assure compliance with
environmental regulation and appropriate reporting by
environmental accounting.
 Fourth is education of students, future practitioners, to
provide technical and legal bases in academic preparation
and to avoid ‘discipline insularity’.

Possible reasons for multiple disciplines given by Mathews (1997)

include organizational legitimacy and the need to influence the
capital markets. There are other motivating factors, whose relative
importance of any particular influence is not known in general.

Program Target
Government directed
Common sense initiatives Pollution control
Transportation partners Use of vehicles
Green Lights Program Energy efficiency
Waste Wise Program Recycling

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Climate Wise Program Emissions Control

Corporate sponsored
Proactive environmental policies EMS, ISO 14001
Environmental accounting and auditing Performance
Environmental life-cycle and supply chain Products and
management supplies
EMS and full-cost
Integrated environmental program
accounting

Table 1. Business uses of environmental accounting data (Gallhofer

and Haslam, 1997). The integration of environmental policy with
business policy has been adopted by enterprising business
companies; see Figure 1. This action provides costs savings,
avoiding regulatory processes, and finding new business
opportunities. Business uses are described in program terms and
the targets for the programs.

The contribution of other disciplines must be recognized.

Accounting research will need to be interdisciplinary in nature.
Development will provide challenges and opportunities different
from those of the past, but, also, will lead to a much richer set of
data, or more comprehensive set of models for the solution of
problems of environmental disclosures (Bebbington, 1997).

Producing environmental accounts

Aconcise way to view the disciplines involved in producing

environmental accounts is to consider users of the accounting
reports. An array of goals for users is aligned as follows
(Bebbington, 1997):
• to assure compliance with regulations;
• to increase efficiency of resource use energy and material, and to
decrease waste;
• to reduce or minimize damage to the environment over the life-
cycle of products and processes and
• to continually improve environmental performance in the above

19
areas.
These goals are direct goals for operational managers, and are
integrated goals for general management and for environmental
managers; see Figure 1.

Training environmental auditors

Environmental auditing is a determinative function (Medley, 1997).

Credibility of the environmental audit is crucial. From a discipline
point of view, environmental scientists initially performed the audit.
That audit was to determine compliance with regulation. It has
since advanced to determine compliance with management’s
environmental controls, noted above to be higher requirements
than statutory.
A discipline development is to train environmental auditors
separately from financial auditors (Medley, 1997). This
development again places impetus on standards in environmental
accounting; these are reliable measures of environmental impact,
assets and liabilities. The audit is thereby based on reliable
environmental representation in the accounting record and
performance. The environmental scientists have reduced their
knowledge into the accounting records, along with non-
environmental accounts (financial accounts), to the performance
analysis. In this way, accountants are offered environmental
opportunity and are prepared to deal with those demands.

It is recognized that the enabling potential of environmental

accounting arises from its engagement with practice (Bebbington,
1997). There are clear examples of business and environmental
accounting having beneficial impacts on the environment within
business activity. These areas, and users, identify data gathered
for accounting purposes. Specifically regarding environmental
accounting, quantifying environmental costs is a target within
accounting. The extent of disciplines needed is seen from
generating environmental cost and cost savings within complex,
interdependent processes and facility locations.

The weight of non-accounting disciplines is shown in education of

20
accountants on environmental activities (Gibson, 1997). The
multidiscipline approach is useful as it involves potential users in
the same education effort. The operational managers are shown
the need for data and the nature of environmental reports. General
management is shown potential for improvement in environmental
performance.

Educating environmental managers representing the multiple

disciplines is important for base line reasons (Wycherley, 1997).
Operational managers consider that accounting systems are
created for financial purposes and not for the operational needs in
their managing and controlling environmental impacts of products
and processes. (See below ‘Environmental management’.)

INTEGRATING THE ENVIRONMENTAL

DEPARTMENT WITH BUSINESS FUNCTIONS

An objective of integration of the environmental management

department with operational functions is to enhance environmental
performance of the organization (Fryxell and Vryza, 1999). So the
levels and the mechanisms of integration, to achieve improved
environmental performance, are of organizational interest.

One level of integration is aimed at involving environmental

considerations in every day decisions. That integration is based at
the level of adopting a corporate culture into environmental
awareness. This crucial approach puts the impetus for considering

21
environmental impacts into business strategy and decisions.

The other level of integration is organizational, deciding which

business functions are to be integrated. As functions have a
conventional purpose in the hierarchy of the organization,
integration takes the form of coordination. Organization theorists
identify such mechanisms as conventional and as non-
conventional. Non-conventional is in the context where the
environment exerts direct influences on the organization through
regulations, international standards and shareholders.

The two sets of integration mechanisms are the following (Fryxell

and Vryza, 1999):

Non-
Conventional
conventional
Cross-departmental
Department schemes
relations
Management Information
Central decision-making
Systems
Written policies and
ad hoc group mechanisms
procedures

Formal planning Integrator roles

Output and behaviour

socialization
control

It is recognized that conventional mechanisms exist, and are

displaced by non-conventional ones to cope with time-oriented
changes; these changes are in the environment or are required
environmental performance.

Environmental management

From these needs and mechanisms, the function of an

22
environmental management department is to facilitate integrative
development. To achieve this integration, the department is
responsible for the following (Wycherley, 1997):

 scanning and monitoring the changing environmental context

of the business;
 identifying critical information;
 requiring change to environmental practice and performance;
 Validating and channelling the information to ensure
compliance with regulatory mandates.

Note that these functions may constitute both direct influences and
contextual change. Each function represents a discipline
specialization, and hence makes a unique contribution to
environmental performance (Fryxell and Vryza, 1999). Resolution
of differences is the clearest for technical functions (production and
legal), and is most complex for nontechnical functions (marketing
and public relations). The long-run environmental goal brings a
balanced, optimal level among the functions.

The environmental management system

A useful vehicle for integration is the environmental management

system (EMS), with ISO 14001 standards; see Box 2. The EMS
integrates functions through each function’s interfacing with input
and output of that system.
The means toward activating an EMS are found in outcomes from
the EMS:

 reduction of emissions and waste,

 product design for the environment
 energy efficiency and conservation and
 Opportunities to enhance environmental impacts.

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Goal: Shaping environmental success
Setting and attaining goals for sustainable future
responsibility shared by all sectors: government, industry,
environmental groups and citizens

Goals for 2010

Fully implement globally environmental policy
Promote environmental ethics
Implement principles of sustainable development and eco-
efficiency into
business strategies

Guiding principles and environmental code

Community awareness and emergency response
Process safety code
Employee health and safety code
Product stewardship code
Distribution code
Pollution prevention code

Business principles
Company values
Re: people, customers, products and services, conduct code
and guiding
Principles

Auditing performance management

Auditing program
Business standards
Government regulation
Industry initiative
Environmental health and safety auditing
plan
Frequency and level
Box 2. A business environmental management system (Sutherland,
2002).

The EMS provides control and coordination by the environmental

24
management department. The reason is to cover gaps due to
functional differences in departmental roles (Fryxell and Vryza,
1999):
i. bridge differences in basic values, due to specialized training;
ii. communicate, avoiding technical jargon;
iii. recognize separations in organization and location;
iv. resolve expectations on rewards and conflicts on reward
criteria.

These differences are viewed as conflicts. In the conflict situation,

integration is viewed as a resolution by alignment of the
organization with the firm’s environmental goal.

The corporate EMS is identified as based in surpassing

environmental obligation under regulation. The EMS is said to
provide specific tools (including life cycle accounting and
environmental cost accounting), and, also, general practices to
evaluate environmental performance. Environmental auditing is a
main evaluation mean.
Rondinelli and Vastag (2000) suggest that a voluntary, above-
regulatory-standard approach is needed to advance national
environmental policy. Interdependent principles of economic
viability, energy conservation and environmental quality constitute
a comprehensive environmental policy, and are given as the
needed impetus. Basing the EMS on ISO 14001 standards puts the
corporation in global markets and provides a competitive
advantage (Owen and Lehman, 2000).

The corporate environmental policy

Rondinelli and Vastag (2000) make the case for a corporate

environmental management policy. After reviewing the present
status of US environmental regulation, as command and control,
Rondinelli and Vastag show that the proactive approach to
environmental management consists of

 life-cycle analysis of products and processes,

 environmental policies of companies in the supply chain,

25
  recycle, remanufacture and redesign of products,
 monitoring and auditing environmental performance and
 Accounting for environmental costs and savings.

Environmental management should be part of every corporate

business strategy. Not only are there specific environmental effects
in strategies and plans, but there are also environmental programs
to reduce and prevent environmental impact.

Corporate environmental policy and the

environmental management system

Benefits of an EMS, utilizing ISO 14000 (see Table 1), provide a

competitive advantage on a worldwide basis. Competitive
advantage is over companies that do not have a high level of
environment performance from such an EMS.

From this integrative view of an EMS, major components of an EMS

are described as an operational approach to its implementation
(Rondinelli and Vastag, 2000):

 a senior management commitment to an environmental

policy;
 a planning process that identifies all environmental aspects of
operations, sets objectives for environmental improvement
and outlines effective environmental management programs;
 a structure of responsibility for environmental management,
training, awareness and competence, documentation and
communication, procedures for control of environmental
impacts and preparation for emergency preparedness and
response;
 a system for monitoring and measurement, for reporting non-
conformance and for taking preventative and corrective
actions and
 a management review process, to assess the effectiveness
and adequacy of the EMS.

26
The design of the EMS is to provide assurance of continuous
improvement of performance.

Development of environmental standards

A main premise of the EMS is use of standards of an international

nature (ISO 14000); see Box 3. This use of internationally based
standards provides a comparison to ascertain whether companies
are complying with expected environmental performance.

There are dual problems with this approach. One is the assumption
that the company is using the standards to go above legal
compliance with their environmental performance. The other
potential problem is responding to inquiries based on these
enhanced measures of environmental performance by government
agencies, financial institutions and shareholders.

27
The international environmental management standards are set
in the ISO 14000 process. The resulting standards are voluntary
for a company and are higher standards of performance than
from regulation. The standard-setting process was set as part of
the Global Environmental Initiative in 1992 in connection with
the UN Conference on Environment and Development.

Key advantages of ISO 14000 are

 to set environmental performance standards above

regulation and
 to set the company as environmentally alert.

The first advantage moves the company above an increasingly

complex set of regulations, yet in full compliance. The second
advantage puts the company into an internationally
competitive position in markets. Both are achieved by
incentives to adopt pollution prevention practices.
The following are components of the ISO 14000 standard-
setting process:

 ISO 14001 – the basic framework of an EMS; implements

corporate environmental policy
 ISO 14004 – a checklist to implement ISO 14001 and
method to assess environmental impacts
 ISO 14031 – setting objectives and targets of EMS
 ISO 14010 – guidelines for environmental auditing
 ISO 14011 – guidance for audit procedures
 ISO 14012 – qualification criteria for environmental
auditors
 ISO 14020 – standards on environmental labelling
 ISO 14040 – guidance for assessment of product life-cycle
environmental impact

Environmental cost accounting (ECA) is the integrating feature

of an EMS. All elements of environmental measures are brought
together in the ECA calculation. By recognizing the complete
set of environmental costs, the company can be both

28
environmentally responsible (for example, Responsible Care
program) and cost-effective in recouping its costs.

Box 3. ISO development of environmental standards (Lally, 1998).

29
Role of environmental manager

The environmental manager is a central focus of environmental

management in the company. Key roles of this management
function are (Wycherley, 1997) to
• assess, review and monitor the environmental performance of
the company,
• monitor legal requirements,
• implement and manage the EMS and
• promote better environmental awareness in the company.

The function has a wide range of responsibilities. The more direct

are

 at the base level, systems to ensure compliance with

environmental standards (regulatory and EMS),
 at an on-going level, increasing efficiency in use of resources
and reduce waste, and
 at an overall level, avoiding risks of damage to the
environment.

An integrative view of these responsibilities includes involvement

in new product and process development, capital project
authorization and an environmental stance with shareholders,
consumers and employees.

From this pivotal location in the organization, the environmental

manager’s view of environmental accounting is somewhat
determinative of effect. Environmental managers view
environmental accounting as providing the financial data with the
technical–functional improvements required by the role of the
environmental manager. Areas of conflict are identified as
accountants’ concern over their own costs to the detriment of
needs in measuring performance.

A survey of environmental managers shows that environmental

accounting is considered primarily for providing measures of key

30
environmental data. These costs are used in measuring use and
waste, and also as criteria in capital investment projects and
targets for efficiency setting. These costs are also used in
management control systems to improve operational efficiency,
and in EMS to monitor environmental policy.

BUSINESS USES OF ENVIRONMENTAL

ACCOUNTING COSTS

A broad view of environmental accounting, and the EMS, includes

application of techniques and procedures to support management
decision making, performance measurement, recognition and
reporting of liabilities and contingencies, capital market reactions
to accounting disclosures and taxes (Bebbington, 1997). Tax
implications include
 specific environmental taxes,
 appropriate treatment of environmental expenditures,
 pollution allowances as tradable permits and
 general Federal income tax issues.

An example is Superfund surcharge taxes for EPA environmental

cleanup.

A construction industry illustration

An illustration of environmental accounting and environmental cost

determination shows how ‘costs of environmental errors’ (CEEs)
are treated (Gulch, 2000). In an accounting context, this is an
illustration of managerial accounting applied to environmental
impacts. Managerial accounting and CEE both provide the full
range of accounting treatment; see the introduction.

CEE is designed to determine

I. the financial burden of environmental regulation,

II. the impacts on environment and society and

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 III. the costs of measuring environmental impacts.

CEE is for internal use as managerial accounting providing a

business perspective.

From a control perspective, four types of environmental cost need

to be recognized: prevention, internal failures, external failures and
appraisal. These costs reflect

 costs for prevention or correction of environmental impact in

facility construction or use of facility,
 prevention costs related to correction of defects and
 cost of end-of-the-pipe control, preventing repetitive error.

CEE is applicable due to complexity of regulation in the

construction industry as reflected by multiple environmental
standards and ambiguous formulation of standards. This is likely
due to poor knowledge in the content of environmental and other
standards in multiple materials.

CEE is indeed a managerial tool with real project uses in the

construction industry (Gulch, 2000). The overall effects on the firm
include legitimacy, responsibility allocation, creating consensus,
facilitation of communication and keeping score. Probably the most
significant use is relating costs to causes of errors, more
specifically, environmental costs to errors.

Environmental Policy versus Environmental

Regulation

There is a growing understanding that environmental policy must

fit within the company’s business strategy (Gallhofer and Haslam,
1997). Companies do adopt an environmental policy. The question
is whether a voluntary policy should forestall regulation
(interventionist regulation). As environmental policy and
environmental performance are expected to be above legal
regulation, there is interest to change from regulatory policy to
voluntarism; see Figure 1.

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An intermittent ground is to avoid regulation of environmental
accounting. Environmental accounting is parallel to financial
(business) accounting: an environmental plan is developed and
budget control established to the plan. Following environmental
performance based on the plan, an environmental audit for the
environmental impact is performed. By imposing standards on
environmental accounting and environmental auditing, the
company is left to set standards for performance without
regulatory intervention (Reynolds and Reynolds, 2001).

Bebbington (1997) recognizes the realism of actuating impacts on

society. The business organization has impact through capital,
ownership and societal uses of products and services, with impact
on the environment: resources, sinks and habitat. Environmental
accounting translates into how environmental management
practice adapts to beneficial impact on the environment. From
environmental accounting comes accountability for effects on and
uses of the environment.

So then, environmental accounting is the enabling vehicle to form

a common basis for users of the environment:
 internal (capital, ownership, consumers) and
 external (social–political) controls.

The effective vehicle is environmental reporting (Dorweiler and

Yakhou, 2002). Reporting portrays accountability to outside
interests. These interests may require openness and transparency
regarding the environment, and require change in the organization,
changes in business products and processes and change in
organization structure. While such changes are early in developing,
a projection is for change to occur in other business areas
(Bebbington, 1997; Reynolds and Reynolds, 2001).

EDUCATION FOR THE MULTIDISCIPLINE TEAM

Courses provide environmental education across the

interdisciplinary range (Gibson,

33
1997): economics and commerce, environmental sciences,
environmental law and environmental accounting.

Business strategy requires environmental planning with

measurement and environmental management issues included.
This strategic approach requires understanding of environmental
law and regulations and integrated decision-making. Consideration
of several business areas, financial results and tax effects presents
complete effects on a business.

An extended view of accounting and environmental accounting is

shared with all disciplines (Grinnell and Hunt, 2000). The objectives
of this education are

 environmental protection and

 sustainable use of resources.

The issues affect disciplines in the operating sphere and in financial

effects. Addressing these issues only on the accounting sphere
recognizes the contribution of accounting to achieve business goals
of profitability and survivability.

Several areas have identified shortcomings in accounting

education related to environmental accounting (Gibson, 1997). The
range of broad education should be viewed functionally, making
the environmental accountant a member of the business team.
This business range starts with profit and profitability and covers
environmental impact and sustainable use of resources.

CONCLUSION

A contextual view of the need for integration of an environmental

policy with business policy, and for a multidisciplinary team, is
given from a business perspective:

 the role of accounting in supporting both corporate

environmental strategy and corporate business strategy and
 the several accounting sub-disciplines related to

34
 environmental issues.

Emphasis on the multi-discipline team is to support a top-level

strategy and to achieve the benefits from directing a company in
an environmentally sound manner.

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